Top Tax Tips for Retirees

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We spend a lot of time on our site helping and talking to early retirees, semi-retirees and Canadians preparing for full-on retirement. A few tax tips and themes have emerged with all of those clients:

What are some of those tax themes in preparing for retirement?

What are some of the top tax tips for retirees?

Read on, we’ve got some details!

Top Tax Tips for Retirees

Beyond talking about the weather, or inflation; beyond discussing Tim Hortons coffee or hockey – Canadians love to talk taxes. 

What’s more, Canadian retirees or soon-to-be retirees love to avoid taxes!

Rightly so. We hope to avoid taxation in our retirement as well.

In Beat the Bank by author and former banker Larry Bates, (you can read more here from My Own Advisor’s interview with Larry), Larry highlighted some wealth-builders and wealth-killers:

Wealth builders:

  1. Your savings rate and investing/contribution amounts.
  2. Time invested.
  3. Rate of return.

You have some direct control over a few of these wealth-builders. Essentially, the more money invested, the more time it remains invested, and the higher rate of return for your investments – the larger your retirement nest egg will be.

Dividends – don’t you know – are a HUGE part of stock market returns.

Top tax tips for retirees

Source: RBC

This means as part of wealth-building you must at least consider the compounding power that reinvesting dividends delivered from dividend paying stocks can deliver.

Further Reading is here: How to Automatically Reinvest Dividends.

Wealth killers:

  1. Money management fees
  2. Inflation
  3. Taxation.

Any one or more of these things are wealth destroyers.

You already know from reading our site that money management fees are forever – meaning the money you pay in fees to manage your investment portfolio is money you will never see again – so choose wisely when you consider how and by whom your money is managed.

If you haven’t already done so, consider building some or all of your portfolio with some low-cost Exchange Traded Funds (ETFs).

When it comes to minimizing taxation, we believe you should consider investing in the following order in your asset accumulation years, generally speaking:

  1. TFSAs
  2. RESPs – if you have kids (including taking advantage of the government grant)
  3. RRSPs
  4. Taxable accounts.

When it comes to minimizing taxation in your asset decumulation years, a long list of considerations comes to mind.

Here are our top tax tips for retirees, to help avoid and/or minimize the impact of wealth killers in retirement.

Top Tax Tips for Retirees – Asset decumulation

1. Keep assets in the right location

Generally, there are four types of investment income and each source is taxed differently:

  • Canadian dividends
  • Capital gains
  • Foreign income
  • Interest income.

Canadian dividends and capital gains are taxed more favourably. Canadian dividend income receives the dividend tax credit. At the tme of this post, only half of capital gains are subject to income tax. Interest income and foreign income, on the other hand, do not benefit from any preferential tax treatment and are fully taxable.

So, in keeping the tax treatment of these four types of investment income in mind, we believe if you are going to invest in a taxable account then consider investing for Canadian dividends and/or for capital gains. This means in retirement, consider owning any Canadian equity holdings in your taxable account. On the flip side, you can then own other assets that earn interest income or foreign income in tax-sheltered accounts like your RRSP/RRIF or LIRA/LIF.

Being tax efficient with your asset location not only has the potential of significantly reducing your annual tax liability but it can also deliver a healthy tax-efficient income stream throughout retirement.

We’ve seen this direction taken with many of our clients, and they are wealthier for it.

2. Get the tax credits available to you

Tax credits, without too much more mention, are natually helpful in reducing tax liabilities. The major tax credits that are intended for retirees are the age amount and pension income amount, but there are certainly others!

As a senior, here are some of the most common things that you may be able to claim:

  1. Pension income splitting – As a pensioner, you may be eligible to split up to 50% of your eligible pension income with your spouse or common-law partner to reduce the amount of income tax you may have to pay, if your spouse or common-law partner is in a lower tax bracket.
  2. RRSP deduction – Deductible RRSP contributions can reduce your taxes owing. You can contribute to an RRSP up until the end of the year you turn 71. You can also contribute to your spouse’s or common-law partner’s RRSP until the end of the year they turn 71.
  3. Medical expenses – You may be able to claim eligible medical expenses you or your spouse or common-law partner paid in any 12-month period.
  4. Age amount – If you were 65 years of age or older, and your net income is below a specific threshold, you can claim up to thousands on your tax return.
  5. Disability tax credit – If you have a severe and prolonged impairment in physical or mental functions, you may be eligible for the disability tax credit (DTC). If your spouse or common-law partner or your dependant has a severe and prolonged impairment in physical or mental functions, are able to claim the DTC, and they don’t need to claim all or part of the amount, they may be able to transfer the amount to you.
  6. Pension income amount – You may be able to claim up to $2,000 if you reported eligible pension, superannuation, or annuity payments on your return.
  7. Guaranteed income supplement (GIS) – The Guaranteed income supplement (GIS) provides a monthly non-taxable benefit to Old Age Security (OAS) pension recipients who have a low income and are living in Canada.

Check out how you can retire on a lower income with GIS here.

3. Split your pension income

Splitting pension income between spouses in retirement is another common way to reduce your household’s tax liability. With pension splitting, the higher-income spouse may transfer up to 50 per cent of their eligible pension income to the lower-income spouse. This reduces the household tax bill because the transferred income will be taxed at a lower rate in the lower-income spouse’s hands.

In fact, each individual can claim this amount for a total of $4,000 per year. The eligible pension depends on the type of income and/or the age of the pensioner. For example, Registered Pension Plan payments are considered ‘qualifying pension income’, regardless of the recipient’s age.

Both spouses must opt for pension income splitting on their tax forms. If both spouses have eligible pension income, only one can allocate funds to a spouse or partner in each tax year. Both must file a tax return that includes the elected split-pension amount.

What payments are eligible for pension splitting?

For those under age 65, the most common form of eligible income is from a registered company pension plan, whether defined benefit or defined contribution.  Individuals who are age 55+ can split pension income with their spouses.

Individuals without a registered pension plan can also take advantage of this tax strategy by converting their Registered Retirement Savings Plans (RRSPs) or deferred profit-sharing plans into income through a life annuity or a Registered Retirement Income Fund (RRIF). It’s important to note, however, that this income doesn’t qualify for splitting until after age 65.

If you are 65 years or older, eligible income includes:

  • Registered Retirement Savings Plan (RRSP),
  • Registered Retirement Income Fund (RRIF) or
  • Deferred Profit Sharing Plan (DPSP).

What payments are not eligible for pension splitting?

  • Canada Pension Plan (CPP) payments
  • Québec Pension Plan (QPP) payments
  • Old Age Security payments
  • Earnings from a United States individual retirement account (IRA).

In terms of government pension sources, the Canada Pension Plan (CPP)/Quebec Pension Plan (QPP) isn’t considered eligible income, although CPP/QPP benefits can be split based on a separate set of “sharing” rules.

What are the benefits of pension splitting/income sharing?

  1. It reduces the taxpayers’ marginal tax rate. By transferring income, you decrease your net income and increase the income of a spouse/partner that has a lower income.
  2. It reduces the OAS clawback.

Sharing CPP or QPP is available to spouses receiving these pensions but it’s important to note that CPP sharing is not the same as pension income splitting. The complete list of eligible pension income sources can be found on the Government of Canada website with a quick Google search.

4. Convert your RRSP to an RRIF before age 71

As someone approaching retirement or considering retirement, you know RRSPs must be closed/collapsed in the year an individual turns 71. It does not mean however you need to take RRIF income in that year.

To be tax-smart, avoid major RRSP withdrawals or worse still, unless the RRSP value is very low, deregistering the entire RRSP amount in one year.

Instead, convert your RRSP to a RRIF and start taking your annual RRIF payments in the year you turn age 72, or ideally, for some, well before.

What we see often at Cashflows & Portfolios (when we do retirement income projections; in a low-cost way for Canadians), is the opportunity to convert RRSP assets to a RRIF income stream to help “smooth out taxes” for a few decades.

RRIF payments can be taxed annually at a lower marginal rate, so, the tax liability that is your RRSP nest egg is essentially spread out over time, avoiding major tax hits in any given year. This means, you should consider avoiding some conventional financial wisdom: always waiting until age 71 to convert your RRSP to a a RRIF.

If fact, based on pension income splitting information we shared above, if Canadians are age 65 or older and not receiving other pension income such as a workplace pension, then converting a portion, or all, of the RRSP to a RRIF early will allow retirees to take advantage of pension income splitting and withdraw money tax-free up to $2,000 per year.

For any diligent investor, with a large RRSP balance, mandatory age-related RRIF withdrawals can translate into larger taxable withdrawals and therefore increase taxation in your 70s and 80s when you least want that burden.

5. Consider your retirement income drawdown order carefully

Beyond the free posts, giveaways, and other free content on our site, we are happy to offer retirement projections for any Canadian at a low-cost. We’ll link to those services again later, below.

Aligned to #1 and keeping your assets in the right location, is the tax-savvy opportunity to draw down your assets in the right order to reduce taxation.

In a non-registered investment account, the great news is Canadian dividends, capital gains (and any return of capital) are taxed lower than interest income. However, this also means depending on any pension income, RRSP/RRIF assets, TFSA assets and other income streams in retirement, depleting the taxable account early in retirement could be the best account to draw down first (although not always)!

In order to maximize deferring taxes in retirement, a rule of thumb we help clients out with is withdrawals from the least tax-efficient accounts to the most tax-efficient sources – a “withdrawal order” if you will.

Here are some examples from least efficient to most efficient, depending on the clients’ assets and income sources:

  • Investment income earned from investment holding companies, then
  • Higher-income spouse/partner’s non-registered account, then
  • Lower-income non-registered account, then
  • LIFs, then
  • RRSP/RRIFs, then
  • TFSAs “near the end” for any estate planning or wealth transfer.

This withdrawal order is hardly a recipe but it does sometimes make sense to slowly withdraw from your taxable account(s) and/or RRSPs/RRIFs, early in retirement, to help “smooth out taxes” over a few decades as we have highlighted above.  The actual withdrawal order recipe would depend on your specific situation.

Top Tax Tips for Retirees Summary

Beyond our list, there is of course spousal RRSPs (to split income between spouses during retirement) and also spousal loans to consider, but those are more nuanced subjects to discuss in detail for another day.

We believe if you can consider the following top tax tips for your retirement, you’ll be way ahead of most:

  1. Keep assets in the right location.
  2. Claim the tax credits available to you.
  3. Split your pension income.
  4. Convert your RRSP to a RRIF before age 71 (at least a portion).
  5. Consider your retirement income drawdown order carefully.

Need help with your retirement income projections and mastering income planning?

Everyone has different retirement income needs and wants. We know. We’re working through our own semi-retirement income solutions right now!

Personal finance is always personal.

So, depending on your assets (such as RRSP/RRIF assets, a workplace pension, government benefits, TFSAs, LIRA/LIFs, and more), including rental incomes and/or corporations to consider, your retirement drawdown puzzle could be very complex.

Your options and combinations may seem endless:

  • What registered accounts do I draw down first?
  • How much income will my investments generate?
  • Do I have any idea how long this income might last?
  • What amount of taxes will my RRSP withdrawals incur?
  • When should I take my workplace pension?
  • Is it more beneficial to draw down non-registered money before RRSPs and TFSAs?
  • Can I avoid OAS clawbacks?
  • And much, much more…
Knowing how to demystify the retirement income puzzle is not trivial work but it’s absolutely something we can help with – we’ve helped dozens of clients in the last few months alone!
If you need some help solving your retirement decumulation puzzle (i.e., how to efficiently withdraw from your retirement accounts), or figuring out if you have enough saved to spend for your retirement income plans, what your maximum income spend might be, we’re here to help answer those questions and more!

If you are interested in obtaining private retirement projections for your financial scenario, please contact us here to get started.

Stay tuned for more, great, FREE content on our site. We’re happy to help.

Mark and Joe.

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4 thoughts on “Top Tax Tips for Retirees”

  1. Thanks for your article on tax tips for retirement. I’m wondering about order of withdrawing assets. If I am receiving a defined benefit pension doesn’t it make sense to withdraw RRSP assets earlier than taxable assets and delay CPP/OAS until those RRSP funds are substantially drawn down? The RRSP assets will be fully taxed whether or not the growth is from dividends/capital gains. Even if I don’t need the money, if I withdraw RRSP funds when in a lower tax bracket and reinvest in a taxable account, my tax liability will be less, correct? I know of some cases where RRSP/RRIF assets were held as long as possible because of the “tax deferral” which resulted in a huge tax liability upon their death when the RRIF assets became taxable all at once.

    Reply
    • It really depends David. It can depend when you want to spend the money, if you want to leave an estate, what tax rate you’re comfortable in/with and more.

      Most often with clients, we see the desire and need to “smooth out taxes” so a slow, systematic withdrawal of RRSP/RRIF assets is helpful in the 60s and 70s while pension income is flowing in. Doesn’t have to be that way of course.

      If you don’t need the money, then certainly, move money out of the RRSP in your lowest tax-years and funnel that money to your non-reg. account or TFSA. That seems to be best. This makes a good withdrawal order “NRT” or “RNT“:

      1. Non-registered (N) and/or RRSP (R) to depleted before,
      2. TFSAs (T).

      Thoughts?
      CAP

      Reply
  2. The calculations depend on one’s expected lifespan, too. How long have I got from retirement till my whole RRIF becomes fully taxable as income at my death?

    While I’m alive and well, I can let my assets continue to grow inside my RRIF, tax free, taking out the minimum every year (and splitting it with my spouse for tax purposes.) In my case I am earning from dividends more than the minimum withdrawals and will do so for a couple more years.

    However, when I die, all that gets taxed at full marginal rates. If I took more of it out and invested it in my non-registered accounts (having maxed my TFSA every year from the returns on my non-registered accounts), at least the growth from the time of taking it from the RRIF is taxed at lower overall rates, because the growth is either dividends (assume from Canadian sources) or capital gains.

    So: grow without tax in RRIF, but don’t die too soon, or pay tax in taking it out of RRIF but have it grow with less exposure to taxes from then on?

    One does not always control the ‘don’t die too soon’ factor, of course. So maybe one should get started in depleting the RRIF, at a tax hit that one can afford from year to year. Never a pleasure to pay the tax, but never pay tax on anything is not an option. This probably keeps the rate as low as it can be.

    Not quite an estate freeze, but a variant of it, I suppose.

    Does that sound right?

    P.S. This all depends on one’s caring what happens to one’s assets after death. If I just want to keep MY taxes at a minimum, I should leave the most I can in my RRIF, taking out only the minimum. Once I’m dead, the taxes on the whole amount will not bother me.

    Reply
    • Everyone’s situation is different for sure John.

      We see big advantages of drawing down RRSP/RRIF while you’re alive and deferring capital gains, etc. until the end. That model doesn’t work for everyone but the ability to “smooth out taxes” over many decades and income split if you have a partner is usually ideal.

      It is my hope (Mark) and likely Joe’s as well to largely “live off dividends” in the early part of semi-retirement, retirement as to aovid any sequence of return risk and allow the portfolio to compound away mostly tax-free (TFSA) and tax-deferred (RRSP/RRIF).

      Always a bit of a puzzle for any investor!
      CAP

      Reply

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